2009 Tax Law Update

Congress has been busy with tax law changes.  Below are a few of the highlights that will affect many taxpayers. For more info visit www.Recovery.gov.

2009 and 2010 Changes to Education Credit

 The law renames the Hope College credit for 2009 and 2010—it’s now known as the American Opportunity tax credit—and hikes its value from $1,800 to $2,500 for 2009 and 2010

• The maximum amount of the Hope Credit increases to $2,500 per student.

• The amount of the new credit equals 100% of the first $2,000 of qualified tuition and expenses paid and 25% of the next $2,000 of expenses. So a student must have incurred $4,000 in eligible expenses for a family to receive the $2,500.

• The credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

• The American Opportunity Tax Credit can now be claimed for students within the first four years of post-secondary education. Previously the Hope Credit could be claimed for only the first two years of post-secondary education.

• Forty percent (.40) of the Hope Credit is now a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.

• The American Opportunity credit is only for undergraduates going more than half time and doesn't replace the existing $2,000 Lifetime Learning tax credit.  The Lifetime Learning tax credit can still be useful for graduate and part-time students.

• The credit also can't be claimed against expenses paid from the following sources:
  --Tax-free scholarships and fellowships;
  --Pell grants from the federal government;
  --Employer-provided educational assistance (tuition reimbursement);
  --Veterans' educational assistance;
  --Other tax-free payments received as educational assistance.

• There is no limit on how many family members can receive the credit.

• The term "qualified tuition and related expenses" has been expanded to include expenditures for "course materials." For this purpose, the term "course materials" means books, supplies, and equipment needed for a course of study.

• You may only claim the education credits for yourself, your spouse, or a dependent claimed on your tax return.

• For more information on the Lifetime Learning tax credit, see http://www.irs.gov/publications/p970/index.html

Non-business Energy Property Credit

• This popular tax credit, which expired after 2007, has been reinstated through 2016.

• You may be able to claim a non-business energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service between February 17, 2009 & December 31, 2016.

• This property can include high-efficiency heat pumps, air conditioners (EER>=13, SEER >=16 for split system & package system EER >=12 & SEER >=14), and water heaters (energy factor >=0.82 for gas, oil & propane; energy factor >=2.0 for electric).

• It also may include energy-efficient windows (has a U-factor and SHGC of 0.30 or below & meets the IECC), doors (U factor of 0.30 or below), insulation materials (meets 2009 IECC), and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.

• For products purchased between January 1, 2009 and February 16, 2009, the terms of the tax credit are less clear. The Internal Revenue Service will likely clarify these terms in guidance documents, which are expected to be released later this year.

• The total amount of credit you can claim from 2009-2016 is limited to $1,500 combined.

Until the guidance is released, homeowners generally may continue to rely on manufacturers’ certifications that were provided under the old guidance. For exterior windows and skylights, homeowners may continue to rely on Energy Star labels in determining whether property purchased before June 1, 2009, qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards

Residential energy efficient property credit.  Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same.

First-Time Homebuyers Tax Credit

The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers.

• Applies to purchases that close between January 1, 2009 and April 30, 2010.  You must have a signed purchase contract before April 30 and have closed on the home by June 30, 2010.

• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

• Applies only to homes used as a taxpayer's principal residence.

• You must be 18 years of age.

• Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed. For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

• The taxpayer (and the taxpayer’s spouse if married) must not have owned another principal residence in the U.S. in the three-year period before purchasing the new home.  Thus, the home doesn’t have to be the taxpayer’s first home.  For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter.

• For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009

• Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

• Purchases from certain related persons and acquisitions by gift or inheritance don’t qualify.

• The credit does not have to be paid back unless the home ceases to be the taxpayer's main residence within a three-year period following the purchase.

• Claim the credit on either a 2008 tax return (by amending if you’ve already filed) or a 2009 tax return, due April 15, 2010. The credit may not be claimed before the closing date.

• You must attach an executed closing statement to your return in order to claim the credit.

• The amount of the credit begins to phase out for single taxpayers whose modified adjusted gross income is more than $75,000, or $150,000 for joint filers.

• www.IRS.gov provides more information, including guidance for people who bought their first homes in 2008. 

Long-time Resident of the Same Principal Resident Credit

• An individual (and, if married, the individual’s spouse) who has maintained the same principal residence for any five-consecutive years period during the eight-year period ending on the date of the purchase of a subsequent principal residence is eligible for a credit  up to 10% of the purchase price, limited to $6,500.

• Must purchase after November 6, 2009 and before April 30, 2010.  You must have a signed purchase contract before April 30 and have closed on the home by June 30, 2010.

• House must cost less than $800,000 to qualify.

• Must be 18 years old to qualify and cannot be a dependent  on another’s tax return.

Lean-burn Technology Hybrid Vehicle Credit

Sales tax deduction for non-itemizers for automobile purchases

In hopes of spurring the overall economy in general, and the automobile industry in particular, the recently enacted “American Recovery and Reinvestment Act of 2009” includes a new tax break for purchasers of new cars: a deduction for state and local sales and excise taxes paid on new vehicle purchases. Here are the details.

Sales tax is generally not a deductible item for individuals. A limited exception allows taxpayers who itemize their deductions to claim either state and local income taxes or state and local general sales taxes, which mainly benefits taxpayers with a state or local sales tax but no income tax. Under the new law, buyers can claim an income tax deduction for the sales or excise tax they pay on a vehicle purchase. Key details of this new tax incentive include:

• The tax break applies to purchases of passenger cars, minivans, light trucks, motorcycles, and motor homes, but it only applies on $49,500 of the vehicle's price and it only applies to new vehicles.

• The tax break covers new vehicles purchased between Feb. 17, 2009 and the end of 2009.

• You do not have to itemize your deductions to be able to claim the deduction. However, the deduction cannot be taken by a taxpayer who elects to deduct state and local sales taxes in lieu of state and local income taxes.

• Only couples making less than $250,000 a year, or individuals making less than $125,000 annually, qualify for the full deduction.

*** DISCLAIMER *** This information is general in nature and is intended to help you explore tax saving opportunities. The federal income tax code is complex and contains numerous exceptions to the general rule related to specific situations. You should consult your tax preparer regarding your specific circumstances and should not rely upon general information.